Commercial Contract in Saudi Arabia: Key Clauses That Protect You

A purchasing manager at a factory in Dammam signed a contract to supply production lines worth SAR 1,200,000. The contract page says “delivery within 90 days”, while the technical annex on page 14 says the period “starts from approval of the drawings”. The drawings were approved only four months later. So was the supplier late? The answer was written before signing, but nobody read the contract and its annexes together.

The short answer: before you sign any commercial contract, check six things: the authority of the person signing for the other party, the description of what is required and how it is accepted, payments linked to provable events, the limits of the penalty clause and of any exclusion of liability, how notice and termination work, and the dispute resolution clause. Each of these has a rule in the Civil Transactions Law that decides what helps you and what does not.

Where do you start reviewing a commercial contract?

Start from the deal itself, not from a template. Write down the sequence as it will actually happen: who orders? Who performs? What exactly is delivered? Who inspects? When is payment made? And what happens if part of the performance fails? Each answer becomes a measurable obligation, instead of phrases like “highest quality” and “as soon as possible”. A template copied from another business carries terms and stages that do not match your work.

Then read the contract and all its annexes as one unit: the financial offer, the technical annex, the schedule. Mark each annex with its version number and date, and state in the contract which one prevails if they conflict. Article 104 does not allow departing from clear contract wording on the excuse of interpreting it, and makes the clauses interpret each other. Separate the final version from drafts and correspondence; ten emails discussing an idea do not mean it became part of the obligation.

Article 72 requires the subject of the obligation to be possible, not against public order, and specified by itself or by its type and quantity, or capable of being specified; otherwise the contract is void. If you did not set a quality level and there is no custom or other indication, the debtor must deliver something of average quality (Article 73). If you want more than average, write it in the specifications.

Are an employee's signature and the company stamp enough?

Not always. Write the contracting party's name as in its commercial registration, with its address and representative, because a shop or project name may differ from the company that will carry the obligation. If a representative signs, ask for proof of his authority for this contract, its value and subject: the articles of association, the manager's appointment decision, or a power of attorney.

Article 88 prohibits an agent from exceeding the limits of his authority set in the document that created it, and Article 90 attributes the rights and obligations of the contract to the principal if the agent contracted within his authority in the principal's name. So a stamp alone does not make every employee authorised for every contract. On the other hand, a manager signing in the company's name does not make him a personal guarantor; if you want his personal guarantee, ask for it in a clear document stating who guarantees and what. Name in the contract one person for day-to-day contact, and another who alone is authorised to approve changes.

How should you write payment, delivery and acceptance clauses?

• Link each payment to an event that can be proven: signing the contract, delivery of a specific stage, or approval of a deliverable under a written standard.
• State whether the price includes transport, installation and VAT, and who bears the cost of any change requested after signing.
• Specify who receives, which document proves delivery, within how many days an objection must be made, and what kind of comment prevents acceptance.
• Do not leave acceptance to “customer satisfaction” without a standard, and do not let any signature on a site access record count as final acceptance.

A business contracted for an electronic inventory management system, and the contract says “delivery of the system”.

At delivery it found that moving five years of data and training staff were not included.

If the deliverables, the operating standard, and what happens if data migration fails had been written in detail, both parties would have known what was payable and what needed correcting.

A contract is formed by anything that shows intention, whether words, writing or conduct (Article 33), but proving it is governed by a separate rule: any transaction worth more than SAR 100,000, or of unspecified value, must be proven in writing, and witness testimony is not accepted for it unless there is an agreement or a text to the contrary (Article 66 of the Law of Evidence). So verbal agreements to change the quantity or price need an annex, or at least a written message.

Is a penalty clause always applied as written in Saudi Arabia?

No. Article 178 allows the parties to set compensation in advance in the contract or a later agreement, unless the obligation is to pay a sum of money, and formal notice is not required for it to be due. So a clause such as “a 2% penalty for each month of late payment” on an obligation to pay a price does not fit this article. The natural place for a penalty clause is late delivery or breach of specifications.

Article 179 limits it: it is not due if the debtor proves that the creditor suffered no harm, and at the debtor's request the court may reduce it if it is excessive or if part of the obligation was performed. At the creditor's request, the court may increase it up to the actual harm if the harm exceeded it because of fraud or gross fault. Any agreement to the contrary is void, so a phrase like “the penalty is final and cannot be changed” does not remove the court's power. Link it to a specific obligation and a clear calculation, such as an amount for each week of delay with a cap; a large number intended to frighten usually ends up reduced.

A clause excluding or limiting liability for non-performance or delay is allowed, except for fraud or gross fault, and liability for a harmful act (tort) cannot be excluded (Article 173). So a phrase like “the supplier bears no liability whatever the cause” goes further than the law allows.

What should you write about ending and terminating the contract?

A valid contract cannot be cancelled or changed except by agreement or by law (Article 94). It must be performed in good faith and includes what follows from it under the law, custom and its nature (Article 95). So a client may not use acceptance to block approval of conforming work, and a supplier may not hide information that affects performance. In the contract, distinguish between expiry of the term, termination by agreement, and termination for breach, and set how renewal and termination by notice work, so that an expired contract does not turn into an open relationship without terms.

If one party breaches, the other may, after formal notice (i'dhar), ask for performance or termination with compensation where justified, and the court may refuse termination if the unperformed part is of little importance (Article 107). The parties may agree on a right to terminate without a court judgment, but that agreement does not remove the need for formal notice unless they expressly agreed to waive it (Article 108). If you want direct termination, write the waiver of notice expressly.

Formal notice is given by the agreed method or by any legal means of notification, including filing a lawsuit (Article 177). So write an approved address and email for notices for each party, and set cure periods suited to the type of breach: a late delivery of one item is different from an urgent failure of an operating system. State what survives the end of the contract: confidentiality, handover of data and tools, and settlement of payments for work completed.

Confidentiality, ownership and the dispute resolution clause

Define confidential information, who may see it, and how files are returned when the relationship ends. If the work produces designs, software or content, state expressly who owns it and the rights of use; do not leave it to be inferred from payment and receipt of the file.

If you choose arbitration, the arbitration agreement must be in writing or it is void, and a clear reference to a document that contains an arbitration clause is enough (Article 9 of the Arbitration Law). If you leave disputes to the courts, a claim against a merchant in commercial contract disputes is heard by the Commercial Court when the original claim exceeds SAR 500,000 (Article 31 of the Implementing Regulations of the Commercial Courts Law).

This is general information based on the official Arabic texts of Saudi laws, which prevail over any translation. It is not legal advice for your specific case.

Practical solutions for both sides

If you are the party who will pay:

• Write the specifications and acceptance standard in a signed annex; do not rely on the financial offer alone.
• Link payments to stages actually completed, and keep a final payment until final acceptance.
• Check the authority of the person signing for the supplier, and ask for its commercial registration and his authorisation.
• If you set a penalty for delay, keep it proportionate to the expected harm and capped, so the court does not reduce it.
• If the supplier is late, send written formal notice by the agreed method stating what is required and the deadline, and record any change in scope or price in a signed change request.

If you are the party who will perform:

• Link the performance period to what you need from the client: approval of drawings, handover of the site, or the advance payment.
• Write expressly what the price does not include, and do not start extra work before written approval of its price and time.
• Set a period for objections to delivery, so that the work counts as accepted if it passes without written comments.
• Set a cap on your contractual liability, worded so that it does not extend to fraud or gross fault.
• Review the termination clause and any waiver of notice, and ask for a reasonable cure period before termination. If the client pays late, send written notice and keep your invoices and delivery records.

If you have a contract you are about to sign, or a template you want to adapt to your business, send it on WhatsApp and we will go through it with you clause by clause before signing.